Between Pinterest and HGTV, there’s no shortage of inspiration for ways to turn your current dwelling into the home of your dreams. The real question often lies in your budget and how to fund those improvements.
Improvement/Renovation versus Construction
Before lifting a hammer, it’s important to understand the difference between a home renovation or improvement and construction, as the designation could impact your access to financial resources, including a loan. For instance, one of the first questions your banker will ask is around the types of improvements you’d like to make. While some may colloquially use the terms renovation, improvement and construction interchangeably, for the purposes of home equity financing there is a big difference.
A home improvement or renovation is a minor change that allows you to still occupy your home and use that facility. Think of installing new kitchen cabinets and appliances, or bathroom flooring. You can use the equity in your home to finance these types of updates.
Construction is a major change, often those that add square footage or alter the structure of your home. Examples include building an addition to accommodate your growing family or adding an in-law apartment for your aging parents. Unlike improvements, you are not able to finance construction projects with the equity in your home. Instead, you would need a construction loan.
The Value of Your Home
For financing purposes, it’s important to remember that your lender will review the current value, or “as is” value of your home, when reviewing a loan for approval. While your project may add value to your home once it is completed, the lender cannot consider the anticipated value of your home to help you secure financing.
Financing Your Vision: Home Equity Loan or Line of Credit?
If you’re going to undertake a home renovation project, you have a few options for financing. While you could refinance to get cash out of your home, you may not want to do that because it could impact the current interest rate on your mortgage. Instead, you could consider using the equity in your home. There are two types of home equity financing:
Our home equity lending expert Linda Lagarde, home equity consumer loan manager at Rockland Trust, thinks that a HELOC is a great way to finance home improvements. “More often than not, homeowners start a project and it costs more than they initially planned. With a HELOC, you have the flexibility to draw more funds when needed without paying interest until the cash or check is in your hand.”
With your Rockland Trust HELOC, you are able to convert a portion or all of your HELOC, which has a variable interest rate, into a fixed-rate loan. Learn more about your HELOC options. This gives you the flexibility of a line of credit with the predictability of a fixed rate loan.
The Process of Turning Home Equity in to Home Improvements
If you’re thinking about using your home equity to improve your property (and maybe even increase its value), you should first talk to a banker to ensure that you’re looking at all of your financing options.
In order to secure a HELOC, your banker will need documents from you, including:
Unlike other types of loan applications, you are not required to list out other debts, such as credit cards or car loans, because this information is in your credit report.
After you begin your application process, be aware that an appraiser may come by to determine the value of your home. If this appraiser sees signs, like walls taken down or exposed plumbing and/or electric, that person may indicate that home equity financing is not appropriate and that you will need a construction loan. If you have other questions about the process, we compiled answers to common home equity questions.
What Types of Improvements Are Popular?
Outdoor improvements, like an addition of an outdoor patio, deck or kitchen, are gaining popularity. The addition of an outdoor living space to enjoy when the weather is nice can be done through home equity financing
Another example is enclosing a deck or patio to create a three-season room. Because you do not need to knock down a wall, but instead just add a door, this type of improvement may also be covered by home equity financing.
Are You Considering a Home Improvement or Renovation Project?
If you’re thinking about a project and need financing, the best thing to do is talk to your banker about your plans and your options. Our banking experts have helped thousands of homeowners like you through the home buying, improvement and renovation processes. Let us know how we can help turn a house into your dream home and achieve your financial goals.
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